Rebuilding a Small Business

Last Updated Oct 28, 2009 10:19 AM EDT

Sam Cadelinia has been navigating the real estate business for 30 years, and he's ridden out plenty of bad weather. In 1994, when California real estate values faded, his agency came close to sinking. By selling almost everything he owned, including a Porsche and a boat, he survived the storm.

During the past 15 years, Cadelinia and his partner rebuilt the business, and by 2000, it was successful enough for Prudential to ask him to join its chain of agencies. After that, housing prices escalated across the nation, and in San Francisco, where a 7-by-7-mile peninsula restricts home buyers to a limited number of properties, the median price nearly doubled from $475,000 in 2000 to $900,000 in 2007. Even in 2008, a year when housing prices had begun to fall, Sam earned $288,000.

But now — like a lot of small business owners — he’s wondering whether he and his business can make it through this financial crisis. Listings have dropped, and prices have softened. Although the $8,000 tax credit awarded to first-time home buyers has recently boosted sales, the programis scheduled to end Nov. 30 unless Congress extends it. What’s more, Sam’s inventory of agents, who numbered 75 in 2006 at the peak of the boom, has dropped to 70. “Some are so discouraged they’ve left the business,” Sam says. Also crimping his income is the fact that 85 percent of his agency’s sales these days are closed by those who get the highest share of commissions — 75 percent. Thus his margins are smaller.

Agents are crucial to the success of Sam’s business. Like other agencies, whether they sell stock, airline tickets, bill collection services, or advertising, real estate companies depend entirely on their ranks of salespeople to bring in commissions, which are split with the agency. A typical split for an experienced agent is anywhere between 55 percent to 85 percent, but an industrial-strength salesperson can demand a larger share of the commission. In exchange, the company provides support: a brand name that home buyers trust, an office and some marketing materials. Cadelinia, among other things, mails 1,000 postcards to prospective clients on behalf of agents, provides stationery, so-called error and omissions insurance (which covers an agent for malpractice claims), and comparative market analysis that helps guide sellers to put the right price on their properties. In some cases, real estate agents may have to purchase some of the materials.

Sam has cut expenses, including Yellow Pages and newspaper advertising, phone costs and the hours of the administrative staff. He and his business partner have slashed their salaries, but he still has a 3,300-square-foot office to pay for. He’s most worried about the possibility that he will lose more agents. He’s sent e-mail “blasts” to try to recruit new ones, but very few people have responded, and those who did weren’t experienced. In fact, one of his best agents, who sold about a million dollars in property each year, insisted that he was entitled to a 90 percent share of the commission. “I couldn’t afford to pay him that, and he walked,” says Cadelinia.

Cadelinia doesn’t want to close his doors. He hardly has a choice. To revive his personal finances, he has to revive his business. Michael Golden, cofounder of @properties, a Chicago real estate agency with more than 800 brokers in six locations, believes that even though real estate is in a downswing phase, Cadelinia and his partner should work to build up their business now. “When times are good, agents don’t want to leave; but when times are bad, they’ll be looking around for a new agency.”

Here’s what Golden recommends.

Recruit More Agents

“Sam won’t be able to revitalize his business unless he builds up his sales force,” Golden says. “It’s the guy with the biggest army who wins.” But he doesn’t believe that e-mail blasts are the best approach. “You’ll never get the good agents that way,” he insists. Instead he suggests that Cadelinia scope out top producers with a service such as BrokerMetrics, an online real estate information service. Then he should lure a prospective agent with a one-on-one pitch that emphasizes the value of affiliating with Cadelinia’s agency.

Use Your Own Agents to Find New Ones

“About 80 to 85 percent of our new agents are recruited by the ones we already have,” says Golden. He recommends an incentive program that would pay an agent a $500 bonus upfront or a percentage of the new agent’s commission over the following year.

Cut Costs Where You Can

“It’s all about lowering fixed costs right now,” says Golden. Referring to Sam’s 3,300 square feet of office space, Golden points out that Sam is paying for 47 square feet per agent. “Our agency devotes only 29 square feet per agent,” Golden says. When Sam adds new agents, he should not expand office space. Golden also suggests that Sam cut down on some of the marketing materials he provides. “A thousand postcards is a lot if you have very high commission splits,” he says. He adds that cutting a top sales agent to shave costs is penny wise and pound foolish. “If I had someone bringing in $1 million, I would let him keep 90 percent of the commission,” says Golden, “Maybe you can negotiate with him on something else; for example, how much marketing support he’ll get. You might consider increasing some of the agents’ fees for marketing materials as well.”

Sam’s Response

Since talking to Michael, we are heavily recruiting new and experienced agents through e-cards and through direct mail. We have also started a career night with another firm in a nearby city. By pooling our resources, we hope to attract a bigger audience. I have also personally started contacting the many agents that I know at other firms to plant the seed that we would welcome them, and to show them what we could offer.”

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